Hertz Global Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Welcome to the Hertz Global Holdings First Quarter 2016 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. I would like to remind you that today's call is being recorded by the company. I would like to now turn the call over to your host, Leslie Hunziker. Please go ahead.

[Leslie M. Hunziker:]

Good morning, everyone. By now you should all have our press release and associated financial information. We've also provided slides to accompany our conference call that can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking-statements are not guarantees of performance and, by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of this date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release issued last night and in the Risk Factors and Forward-Looking Statement section of our first quarter 2016 Form 10-Q. Copies of these filings are available from the SEC, the Hertz website or the company's Investor Relations department. Today, we'll use certain non-GAAP financial measures, all of which are reconciled with GAAP numbers in our press release, which is posted on our website. We believe that our profitability and performance is better demonstrated using these non-GAAP metrics. Our call today focuses on Hertz Global Holdings, Inc., the publicly-traded company. Results for the Hertz Corporation differ only slightly as explained in our press release. With regard to the IR calendar, on June 7, we'll be attending the Goldman Sachs Lodging, Gaming, Restaurant & Leisure Conference in New York. We hope to see some of you there, and of course, that presentation will be webcast. This morning, in addition, to John Tague, Hertz's CEO; and Tom Kennedy, our Chief Financial Officer, on the call we have Larry Silber, Chief Executive Officer of Hertz Equipment Rental; and Jeff Foland, our Chief Revenue Officer will be on-hand for Q&A. Now, I'll the turn the call over to John.

[John P. Tague:]

Good morning. Thanks for joining us. There's been a lot of discussion about pricing in the rental car industry, particularly in the recent quarters. Obviously, pricing is a function of supply decisions. In order to increase RPD, fleets have to come down and utilization has to go up. At Hertz last year, we reduced our average U.S. fleet by 2% with our 2015 ending fleet down 7%. At our Investor Day last November, and again in March, we guided to subsequent reductions. Our current plan for 2016 is for U.S. RAC average fleet to be down 2% to 3%. We based this outcome on our knowledge at the time in the fall as we were seeing more conservative GDP projections and also seeing a somewhat softer business travel environment across all travel sectors. Throughout the first quarter, we maintained a tight fleet in line with the strategy that we outlined during our Investor Day in November. The resulting average U.S. fleet levels were down 6% year-over-year driving fleet efficiency up in the U.S. by more than 500 basis points. And even though our fleet level was on plan, RPD remained under pressure as industry pricing struggled with what we believe was a base level of excess capacity that was then further exacerbated by the mild winter affecting insurance replacement demand and somewhat weaker business travel trends. We believe the pricing pressure we've experienced is temporary, as evidenced by recently improving trends as we move towards the peak season. Unfortunately, the weak industry revenue environment in the quarter masked the significant improvements we are making in other areas. In particular, we are making great progress on our agenda to drive cost takeout and quality improvement. In the quarter, we reduced worldwide rental car unit cost per transaction day by 5% compared with the prior period. This outcome was benefited for more than $70 million of incremental net cost savings. The progress we're making against unit cost will drive earnings leverage in the future as pricing recovers. Since the beginning of the year, in addition to improving operating efficiency, we've enhanced global customer satisfaction across all service metrics in all brands, outsourced our legacy IP systems, and begun building a flexible leading-edge platform. In support of that objective, we recently selected Salesforce as our CRM system provider. Ultimately, this will provide a platform for enhanced customer experience and loyalty programs. Our aim is to drive revenue through increased brand preference. Installation of that new system is well ahead of schedule, and we expect to be fully rolled out by year-end. At the same time, we're moving to a next-generation revenue management system by the end of the summer and importantly, upgrading our fleet system with completion targeted in the first half of next year. Our work in redefining the brands is also well underway and we expect to launch the new position in the fourth quarter. Looking forward, we're in a position to reiterate our guidance of adjusted corporate EBITDA between $1.6 billion and $1.7 billion. Also, importantly, the HERC spin is on track. We've made significant progress in putting together the capital structures and expect our offering to be well-received by the financial markets. As we previously indicated, the transaction is targeted to be complete by mid-year. So, we expect sometime either in June or July. Turning to the balance sheet, our liquidity is strong and we're moving toward our year-end leverage target of at or below 3.5 times for RAC. Despite raising $240 million in proceeds, in part from another sale of the CAR shares, our Chinese partner, we elected not to repurchase additional shares of Hertz Global Holdings during the quarter. While we clearly believe our stock is significantly undervalued, we concluded that given the challenging revenue environment in the U.S. industry in the first quarter, it would be prudent to take a cautious stance for now. Should recently improved pricing trends continue as we expect they will, we will next assess the cadence of our buybacks following the Hertz separation. Then we will be in a better position being more informed about our available liquidity as a result of the actual spin transaction proceeds. Before I turn the call over to Tom to walk you through the details of the quarter, I want to emphasize that our primary objective is to improve business performance as measured by EBITDA and importantly, free cash flow. Supporting those objectives and given the strong returns we generate on airport, we plan to manage our capacity in line with expected market growth. Off-airport, our go-forward strategy is not to chase share with cars or storefronts, but rather to optimize our existing network and customer portfolio. While that could mean lower revenues in time, our focus is on increased profitability and absolute free cash flow. With that, I'll turn it over to Tom. He's going to walk you through the details surrounding the rental car performance in the first quarter; and then to Larry, who will talk to you about the progress he and his team are making in driving their performance agenda at Hertz and preparing to separate their company and move forward as an independent public entity. Tom?

[Tom Kennedy:]

Thank you, John, and good morning, everyone. Before we get into the quarter detail, while we're clearly not pleased with our reported decline in revenue and profitability, which are not unsurprising given a challenging industry pricing environment during the quarter, we are nonetheless encouraged by the recent industry trends and progress on our full potential plan. The recent pricing trends when combined with our progress on worldwide car rental transaction day growth, a material improvement in the worldwide car rental fleet efficiency, significantly higher customer satisfaction scores, a meaningful improvement on unit cost performance metrics, and a strong quarter and a liquidity position provide us with the confidence to achieve our earnings and balance sheet objectives in 2016. Now, let's move on to our quarterly results. For the quarter, we reported consolidated adjusted net loss of $52 million or $0.12 per share and adjusted corporate EBITDA of $155 million, a decline of $71 million on a total revenue decline of 6% to $2.3 billion. Excluding a $30 million FX impact in the quarter, total revenue declined by approximately 5% and excluding a one-time payroll accounting adjustment in 2015, adjusted corporate EBITDA declined by $55 million. On a worldwide car rental basis, which we define as the combination of U.S. and International car rental segments, total revenue for the quarter declined 6% to $1.8 billion. Excluding the impact of foreign currency, revenues declined 5%. While total RPD declined 7%, unit revenue or revenue per available car day declined only 2%, benefiting from a 400 basis point improvement in fleet efficiency to 77%. During the quarter, our strong discipline allowed us to decreased worldwide car rental average fleet by approximately 25,000 vehicles or 4%, while also growing transaction base by 2.5%. On the cost front, we continue to make sustainable progress on our full potential cost savings commitments. For the quarter, we delivered approximately $70 million in new cost savings initiatives. Given the significant unusual decline in industry pricing and negative impact to top line revenue in the first quarter versus prior year, our traditional methods of monitoring cost management, direct operating sales, general administration expenses as a percentage of revenue is masking our cost management progress. As such, when the first quarter cost performance is measured on a non-revenue cost efficiency metric, our results stack up very favorably year-over-year. For example, our GAAP DOE and SG&A per transaction day and per transaction improved 5% and 3% respectively versus prior year. These costs efficiency metrics are strong indicators that we are making meaningful progress in optimizing our overall cost structure, and bode well for when pricing recovers we should achieve improved earnings leverage. Further, as a result of our continued progress on cost management, we are confident that we are on pace to fully achieve our 2016 target of $350 million in incremental cost savings. As a reminder, we do not anticipate pace of the $350 million to be linear across the quarters rather we expect the realization rate of the new program initiatives will be more heavily weighted to the back half of the year. Moving on to business segment review, in the U.S. Car Rental segment, first quarter car rental total revenue declined 8% versus prior year predominantly driven by the industry pricing pressures and closure of unprofitable airport locations in the second quarter of 2015. Looking at the on-airport business, total revenues decreased 8% driven by lower RPD, slightly offset by higher transaction day growth. Most of the RPD decline in the on-airport business are driven by a decline in industry published pricing and increase in the proportion of smaller cars rented, an unfavorable shift in customer mix, and the impact of the change in the calculation of Dollar Thrifty transaction days in conjunction with the counter system conversion at the end of the third quarter 2015. In the off-airport business, total revenue declined 9%, predominantly driven by lower RPD. Transaction volume was negatively impacted by the closure of the 200 unprofitable stores in the second quarter last year and therefore on a same-store basis, off-airport transaction days increased 4% for the quarter versus prior year. The decline in total RPD was driven by highly competitive industry pricing and lower yielding customer mix. In the face of these industry challenges, we remain sharply focused on improving how profitably and efficiently we utilize our fleet assets. Through these efforts, we increased U.S. RAC fleet efficiency by 500 basis points on 2% volume growth and 6% lower capacity. In line with our April 11 business update report, U.S. RAC unit revenues, or revenue per available car day, decreased 3.3%. Overall, the published pricing environment was obviously quite challenging during the quarter and while still not yet considerably healthy, early signs of improvement are evident in the second quarter, especially as we head towards the peak summer season. We are taking actions to improve the mix of cars we rent, enhance our customer segment mix, drive greater customer preference, and steadily increase volume to achieve industry growth levels. Our recent improvements in product and service quality are being recognized as evidenced by our significantly improved customer satisfaction scores across the board. We're also pleased to report we successfully renewed our exclusive partnership with AAA, a highly valuable and long-term strategic partner for the company. On the cost side, U.S. RAC net fleet depreciation per month was 6% higher year-over-year in the first quarter, driven primarily by the anticipated impact of both the decline in used car residual values, and higher program car costs, as well as a reduction in the hold period for certain vehicle types. To help mitigate the rate increase, we continue to focus on the effective management of our total fleet costs. For example, as a result of our improved processes around supply chain optimizations, we're able to reduce over 20,000 cars from unavailable-for-rent status, which is a 34% improvement versus prior year, and an impact of 4.5% on the total fleet in the U.S. RAC. Additionally, we continue to deliver strong results in our remarketing efforts. During the quarter, our total non-program vehicles sold approximately – was approximately 66% remarketed through higher yield channels as compared with 62% a year ago. As a result, our full year 2016 depreciation guidance is unchanged at $290 to $300 per unit per month. So, bringing it all together, U.S. RAC business first quarter adjusted corporate EBITDA was $26 million or a margin of 2%. Looking now at the International Car Rental segment, total revenue decreased 1% year-over-year to – on $433 million. Excluding a $26 million unfavorable FX impact, International RAC revenue declined – increased, excuse me, 6%. Transaction days grew 3% year-over-year. International RPD increased 2% year-over-year driven primarily by strength in long haul inbound business. In International, revenue per available car day increased 1% versus last year driven largely by RPD increase and stable fleet efficiency. The International segment's net depreciation per unit decreased 7% from the prior year on improved fleet management processes, including strategic procurement and greater use of alternative disposition channels. So, in total, the International segment reported an adjusted corporate EBITDA of $11 million or a margin of 3% for the first quarter. This reflects a $5 million reduction year-over-year on a reported basis. However, adjusting for the impact of a favorable non-recurring item last year, adjusted corporate EBITDA improved by $11 million year-over-year. Now, I'd like to turn the call over to Larry Silber, who – our CEO of HERC, to provide an update on the Equipment Rental business. Larry?

[Lawrence H. Silber:]

Thank you, Tom, and good morning, everyone. Before I begin our business discussion, I'd like to update you on our people and operations in Fort McMurray, Alberta, Canada. We're receiving frequent updates on the status of our colleagues and customers who have been affected by the wildfires. All of our people are safe and accounted for. We're doing all that we can to assist them during this challenging time and are committed to providing support and assistance to our employees and constituents in the local area. Now, let me turn to our first quarter results, beginning with slide 17. We delivered a strong operating performance in core markets in the first quarter. We continued to make headway in new sales initiatives that expand and diversify our revenue base and improved key operating metrics relating to increasing fleet available for rent and reducing maintenance cost. We also focused our capital expenditures on investments to support our Specialty Solutions and ProContractor Tools initiatives which, I'm pleased to say, are being enthusiastically received by our customers. First quarter 2016 Worldwide Equipment Rental segment revenues totaled $328 million, a decrease of $27 million from the first quarter of 2015. The sale of the operations in France and Spain accounted for $19 million of the decline. The improvement in non-oil and gas revenues substantially offset the decline in upstream oil and gas markets, while the remainder of the impact was primarily currency related. Excluding upstream oil and gas branch markets, revenue increased 12% and pricing increased just over 1%. Revenue from upstream oil and gas markets represented approximately 18% of total revenues in the first quarter of 2016. Revenues from new customers increased approximately 20% and the volume of new accounts improved approximately 41% over the first quarter of 2015. New customer focused programs such as rental protection and other ancillary offerings also began to take hold and contributed positively for the quarter. Worldwide volumes excluding France and Spain increased approximately 1% due to new account growth. With approximately 280 locations worldwide and about 270 locations in North America, we have a strong footprint from which we intend to build, which you can see on slide 18. During the quarter, we opened three new branches to improve our density by providing additional coverage in strong growth urban markets. In April, we closed five branches in Canada and reduced our workforce there by about 13% to right size the fleet and workforce given the slowdown related to oil exploration. We are also evaluating additional branch closings in the United States for similar reasons. The average fleet in our upstream oil and gas markets declined nearly 20% in the quarter. And while we increased fleet in our non-oil and gas markets by approximately 12% compared to the same period last year, we have also been able to achieve a price lift of just over 1% in the same period. We have approximately $3.5 billion in fleet at original equipment cost, primarily in core equipment such as aerial, earth moving, material handling as shown on slide 19. Our fleet has an average age of 47 months, similar to some of our major competitors. We refurbish and remanufacture equipment when it makes sense and have done so with 45% of the fleet over seven years of age, which makes our fleet younger than of the peers because we both reset the fleet age. We are also supplementing our fleet by adding new Specialty and ProContractor gear, which has a higher dollar utilization than our core equipment and which should drive higher flow through and higher margins over time as we increase fleet in these categories. We were very disciplined with our fleet CapEx this quarter. We purchased $88 million of fleet in the first quarter of 2016 compared to $199 million in the first quarter of 2015. Due to the impact of changes in fleet working capital and equipment proceeds, our net fleet CapEx number in the first quarter is a positive $6 million. Substantially, all of our purchases were for equipment in Specialty Solutions categories such as climate control, HVAC, building maintenance, and remediation and restoration, as well as for ProContractor tools. We incurred a loss on the sale of revenue-earning equipment of $8 million primarily related to sales in upstream oil and gas markets and the sale of equipment manufactured by non-premium brand suppliers as we reduced the number of brands we carry. Reducing the number of suppliers and vendors is a deliberate strategy to enhance operational efficiencies. On slide 20, you can see that over the last year, we reduced the number of vendors by about 40%. Our strategy is simple, a lower vendor count means better leverage for buying fleet and simplifying our fleet also reduces future maintenance and operating costs. We also significantly reduced fleet unavailable-for-rent or as we call it FUR, our metric for measuring the availability of our fleet. This chart shows the progress we are making from nearly 20% a year ago, we are now currently running at a 12% rate. Since we have $3.5 billion in fleet, for every 1% improvement in FUR, we have $35 million more fleet available for rent. You can be assured that our branch managers are focused on this important metric every day. Turning to slide 21, adjusted corporate EBITDA for the Worldwide Equipment Rental segment and for the first quarter of 2016 was $122 million, a $10 million or 8% decline versus the first quarter of 2015. Half of the adjusted corporate EBITDA decline is attributable to foreign exchange and the impact of the sale of the operations in France and Spain. The remainder reflects declines in major upstream oil and gas markets. As you can see, if we exclude upstream oil and gas branch markets, as well as the results of operations in France and Spain, on a constant currency basis we increase EBITDA in each quarter over the previous comparable year's quarter for the last five quarters, and in the first quarter of 2016, we recorded a 14% improvement. On slide 22, our guidance for 2016 is summarized. We remain committed with our full-year adjusted corporate EBITDA guidance of $600 million to $650 million, excluding the cost of being a standalone public company which we state in our recent Form 10 amendment would be an incremental $35 million to $40 million annually. We also expect our net CapEx spending to be in the range of $375 million to $425 million for the full year. And now, let me update you on our separation as a standalone public company on slide 23. As you may recall, we filed our initial Form 10 in late December of last year, and updated it with our second amendment in mid-April. We intend to provide a third update shortly which will include the first quarter results. Our senior leadership team is in place and I'm pleased with the level of talent and public company experience of the executives that have joined the company. As we move closer to becoming an independent public company. We are also pleased with the progress we are making building a strong Board having recently named Herb Henkel, the retired Chairman and CEO of Ingersoll Rand as the nonexecutive chair designee. We've met with the rating agencies, launched the syndication process for our ABL credit facility, and plan to start meeting with the capital markets in the next few weeks. As a seasoned leadership team focused on above average growth, we have significant opportunity for operational and financial improvement while being committed to disciplined capital management. We are excited about the future and look forward to becoming an independent public company, and now back to you, Tom.

[Tom Kennedy:]

Thanks, Larry. Now let me provide an update on the balance sheet and our finance really before I turn the call back over to John for some closing remarks. During the first quarter, the company generated free cash flow of $130 million, which when combined with the $240 million of proceeds from the CAR Inc. transaction, increased corporate liquidity to over $2.3 billion. Our corporate leverage ratio declined to 3.6 times at quarter end, progress consistent with achieving our objective to be at or below 3.5 times by year end for the RAC business. We believe there is a significant dislocation of our intrinsic value relative to our share price during first quarter, and it's continued in the second quarter. However, as John indicated, given the industry pricing pressure experienced in the first quarter combined with the imminent separation of RAC and HERC, we did not get any share repurchases in the quarter and we'll reassess the case of an insured purchase activities post-separation. The financial market continues to be supportive of our assets to capital at attractive rates and terms. To that end, in February, we issued $1 billion of term ABS note for our RAC business at attractive blended rate of 3.02%. In April, we completed a $385 million term ABS transaction for Donlen. During this quarter, we also expect to execute several normal-course fleet debt extensions in seasonal facilities. In addition, over the course of the year, we will continue to prudently access the ABS term funding market to better balance our U.S. RAC mix of fixed and floating rate debt. As we move to the completion of separation of RAC and HERC, we do not expect any share repurchases in the quarter, and we'll reassess the cadence of any share repurchase activities post-separation. The financial market continues to be supportive of our access to capital at attractive rates and terms. To that end, in February we issues $1 billion of term ABS note for our RAC business, at an attractive blended rate of 3.02%. In April, we completed $385 million term ABS transaction for Donlen. During this quarter, we also expect to execute several normal course fleet debt extensions, and seasonal facilities. In addition, over the course of the year, we will continue to prudently access the ABS term funding market to better balance our U.S. RAC mix of fixed and floating rate debt. As we move to the completion and separation of RAC and HERC, we're making significant progress in lining up the requisite bank credit facility and related capital market transactions to improve the debt maturity and leverage profile at RAC, and establish a long-term capital structure with appropriate liquidity at HERC. Given the improving market conditions, we now expect the leverage ratio for HERC to be between 3.25 times to 3.75 times at the time of spin, and RAC to be at or below 3.5 times by year-end 2016. Finally, we expect to complete the separation of RAC and HERC by mid-year, which is targeted for as early June 30 or as late as July 31 closing if we desire to close the transaction on a month-end. With that, I'd like to now turn the call back over to John.

[John P. Tague:]

Thanks, Tom. Thanks, Larry. As you can see from Tom and Larry's remarks, we are now at the long-awaited eve of separating the HERC business and moving these two companies forward. I think the progress Larry and his leadership team are making outside of the transitory noise of oil and gas is evident. The capital structure that will support the company going forward is strong. And I believe that the shareholders of our company today as well as the independent shareholders of both companies going forward are going to be well-served by the work Larry and his team are doing in the HERC business and the progress we're making in the remaining RAC business. We're making tangible progress on our full potential plan. While that progress is certainly temporarily masked by the pricing environment in the U.S. which is currently moderating, lower costs higher quality is what we're focused on and what we are delivering. While residuals are under some pressure, we believe that our guidance accommodates the effect and we continue to be encouraged by the strong progress we are making in alternative distribution channels decreasing our reliance on options. Access to capital and bonds (28

[Operator:]

Thank you. We do have our first question from the line of Chris Woronka with Deutsche Bank. Please go ahead.

[Chris J. Woronka:]

Hey. Good morning, guys.

[John P. Tague:]

Good morning.

[Chris J. Woronka:]

You guys mentioned some brand repositioning coming up in the fourth quarter, and I can understand, you might not want to give us all the details as yet, but can you give us a sense directionally what the goal is going to be there?

[John P. Tague:]

Well, I think, foundationally what we've been focused on first and foremost is improving the customer experience off of each of these brands. So, clearly when we reposition and invest in these brands going forward, we want to do it on a foundation of strength and quality of service, and I think, we're getting at that point where we can have that level of confidence. Look, differentiation amongst brands is historically a struggle in this business, but there are clearly reasons to have multiple brands. So I think going forward, both in terms of customer experience and brand positioning, we're going to continue to push Hertz up as the premium rental car brand in the market, while creating appropriate value positions for the other brands that address their own segmentation. We're also going to try and drive cost out of customer experience delivery across all of the brands and to the greatest extent possible create a differentiated cost position in the value brands.

[Chris J. Woronka:]

Okay. Very good. And then you mentioned shifting the fleet mix a little bit. I was just wondering if you could give us an idea what's going on there. Is this within a segment or size of car or is it more about risk versus program?

[John P. Tague:]

Well, I think what we experienced during 2015 was really an outcome where we took more compacts than probably in an ideal world we would have wanted to in order to access the total fleet plan we wanted. As a result of that, our rented fleet mix quality declined year-over-year and had an impact on our RPD results. We believe we can affect strategy to return to a more normalized fleet mix over the next three to 12 months, and we're undertaking that now and we expect this effect to be temporary.

[Chris J. Woronka:]

Okay, great. Thanks, John.

[Operator:]

We have a question from the line of Adam Jonas from Morgan Stanley. Please go ahead.

[Adam Michael Jonas:]

Hey, everybody. First, you mentioned a few times in your prepared remarks suggesting that pricing is moderating into the second quarter. Without being too specific, could you tell us categorically, if I gave you three options, does that mean down by a more modest amount, stable or possibly improving? What category would you say it in, real time-ish?

[John P. Tague:]

It's category four, observing trends and watching them develop here which are currently moving in the right direction. I wouldn't say that our concern about pricing is over. We're merely encouraged by the directional improvement, but it needs to continue and it needs to be more steep as we move forward. Again, if we get back to supply decisions are impacted by that, obviously the peak season tends to mitigate an overhang, and it will be important that as we assess our fleeting coming off the peak in the Labor Day timeframe that we consider de-fleeting possibly more than would be normally seasonally required depending upon how the market develops.

[Adam Michael Jonas:]

Just as a follow-up, on the cost guidance, so you're saying $350 million for 2016 year-on-year cost savings, most of that heavily backend loaded towards the end of the year. Could you give us an idea then of the year-on-year looking into 2017; how much will be left in terms of year-on-year cost savings bridge from 2015 to 2017?

[Tom Kennedy:]

Yes, Adam, this is Tom. So we haven't disclosed yet all of our initiatives that will impact 2017, but obviously, there's going to be an annualization of the $350 million, which would probably add another $50 million to $100 million on an annualized basis of these new initiatives because it is back-end loaded, as you indicated. And then obviously, we're continuing to make progress on longer-term initiatives that we outlined in our three to five-year plan. As we indicated previously, I think our cost initiatives will continue to make steady progress. The early wins are less technology reliant and the later wins will be more technology reliant, so I think you'll see the 2017, 2018 to really accelerate as we get our new system in place and we're able to leverage that from a back office as well as from a front operational side of the house to really leverage the technology we're investing and to take out the cost in those areas. So it will be an annualization of $50 million to $100 million in 2017. Obviously, we'll have additional initiatives on top of that which we will talk about later this year as we get better visibility on the timing and some of the delivery of those technology initiatives and the impact they will have on our back-office and our front-office operations.

[John P. Tague:]

We're not remotely, Adam, running the business as (34

[Adam Michael Jonas:]

Thanks, John. Thanks, Tom.

[Operator:]

We have a question from the line of Anj Singh with Credit Suisse. Please go ahead. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Hi. Good morning. Thanks for taking my questions. John, you talked about Q3 of fiscal 2015 being an inflection point in your results. And you've definitely made considerable progress on multiple fronts since then. But given the encouraging trends in pricing that you're seeing, if you had to think about when a similar inflection point could happen for U.S. RAC, RPD, or your preferred metric of RACD, when do you think it would be?

[John P. Tague:]

Well, I think we expect things to improve in the second quarter, but I think it's too soon to call it an inflection point. I would expect to see – be more satisfied in the third, but I'm not prepared to say that's a hockey-stick inflection point. It's simply things improving. I do truly believe this is transitory. I think all the industry participants are suffering from the consequences of this pricing environment, and I believe this is largely an industry that's responsible to capital returns to investors. So when you think about what we've experienced over the last several months, you've really got the moderating of a very long bull cycle on residual values. It's moderating. It's clearly not a collapse. It's a moderation. When you combine that moderation and the cessation of rewarding the behavior of incredibly low fleet v (37

[John P. Tague:]

So if you look at the first quarter it's a moderately easier comp, but I'll have Tom there look forward. I think what's most encouraging about this is we're very, very focused on making fleet available for rent, and we're at the early stages of executing on that. We expect performance improvements going forward. Tom can indicate where we might end up.

[Tom Kennedy:]

Yes, I think the first – as I've indicated previously, the first half of the year we do benefit from easier comps because we were going through that significant fleet rotation last year. But coupled with that, we have made enormous progress on the supply chain management of the in-fleeting and de-fleeting progress and the cycle times for which cars are in each of those steps and taking that fleet unavailable for rent down, as John indicated, by 20,000 units or 34% improvement year-over-year. If you look at the long-term history of Dollar Thrifty as an independent company and Hertz as an independent company, I believe the peak fleet utilizations of those companies operating independently is somewhere in the 82% range. From my background previously at Vanguard Car Rental, the peak was around 82%, and I don't think – none of those companies were necessarily – had sophisticated (39

[Operator:]

We have a question from the line of Chris Agnew with MKM Partners. Please go ahead.

[Christopher Agnew:]

Thanks very much. Good morning. You highlighted three things that impacted total RPD. I think the Dollar Thrifty transaction day counting methodology, fuel-related ancillary and mix. I wondered if you could break those out separately for us. And then how do we think about those impacting for the rest of the year? Is there any seasonality to those impacts? Thanks.

[Jeffrey T. Foland:]

Yes. Good morning. This is Jeff Foland. So about 70% of the decline in RPD was related to industry pricing and the DTG days counting methodology that we have previously discussed before. Of the remaining 30%, it came in the form of a number of dimensions, a couple of which you have mentioned, the fleet mix change or the proportion of smaller cars that were rented on a year-over-year basis compared to the same quarter last year, customer segment mix and a small impact as we saw some softening in the corporate travel sector and that traffic was replaced with the other types of traffic that had slightly lower yield during the quarter. And then as you mentioned, the refueling-related ancillary components, which as fuel prices have dropped in the marketplace, the associated ancillary revenues with that have dropped as well. So that's roughly how it breaks down for the on airport business and for the off airport business we saw a somewhat similar mix as well.

[Christopher Agnew:]

Thanks. And can you touch on European book – a separate question – European booking trends and in particular international inbound and level of visibility you have at this stage for the summer peak? Thank you.

[John P. Tague:]

Yes. I think it's too soon to tell really in that context. As we went through the first quarter, we really didn't see anything. Previous events such as were experienced in Belgium had turned out in retrospect to be more moderate than we thought. But we are watching given that this is a peak-booking season for the summer as that develops. So I think there's a moderate level of concern recently in terms of demand, particularly from the U.S. market to Europe, but nothing that we're prepared to extrapolate or that we believe can't be mitigated.

[Lawrence H. Silber:]

With respect to inbound into the U.S. from international locations, we saw modest growth in volume in the first quarter year over year. At this point in time, as John said, it's a little early to predict or project what that will look like for the remainder of the summer as we head into the peak. And we had similar pricing pressures on that business as we saw in the remainder of the portfolio as well.

[Christopher Agnew:]

Thank you.

[Operator:]

We have a question from the line of John Healy with Northcoast Research. Please go ahead.

[John Healy:]

Thank you. John, I wanted to ask you a little bit about some of the comments you made on mobility and Hertz's role longer term. I was hoping if you could give us an update on partnership with Lyft what you're seeing in the Denver and Las Vegas market, and maybe how your thought process is evolving as it relates to that business. Additionally I was curious to know with the partnership that you have with Lyft, they've been in the market raising some capital and some new investors. Is that something you've thought about and is that something you guys have the option to participate in with Lyft?

[John P. Tague:]

Yes. Certainly we have the option to participate in those markets. We've come to the conclusion that from a return for our investors on a risk-adjusted basis, these valuations have moved beyond us being able to have a strategic participation from that perspective. So we have no expectation that we would move forward with the consideration on that level. We do think that there's going to be supply partnerships and management partnerships. We've done pilots with Lyft as you know. Donlen is operating some fleet services with Uber, as we speak, around their own fleet in their lease portfolio. So we're committed to developing a profitable strategic partner relationship with these companies, and I think that those discussions are ongoing and have been for some time and we'll determine what the best outcome is. But, clearly, we're going to find a way to constructively participate in the segment's growth.

[John Healy:]

Great. And I wanted to ask two housekeeping questions. The $1 billion of EBITDA you're expecting on the rental car business this year, what's the expectation for full-year pricing in that guidance for U.S. RAC? And then additionally, any updated thoughts on how you're thinking about leverage the Hertz business post separation?

[John P. Tague:]

So I'll answer the first part and Tom will answer the second part. So, look, we've been very clear that we've provided EBITDA and selective additional guidance. And that's because I think the one's ability to be passing around pricing impact is not terrific. Now, having said that, your next question is, well that sounds (46

[John Healy:]

Okay.

[Tom Kennedy:]

And as it relates to the leverage question, John, as we indicated in our remarks we said previously, the leverage for HERC at spin we're looking at a 3.25x to 3.75x range. That's up from our previously discussed guidance that was updated with the capital markets environment of 3x to 3.5x. Our original target back in March 2014 when we first announced this spin was 3.5x to 4x. So it has moved around relative to the capital markets environment and the performance of the business obviously. The performance of the business, as Larry outlined, is improving, as are the capital markets, which are both positive indicators to allow us to move that expectation from 3x to 3.5x to 3.25x to 3.75x. And obviously we've made a lot of great progress on establishing the capital structure for both businesses and more will come out as we get closer to date, but we clearly will have an objective to use the proceeds in such a way that will allow us to achieve our goal to be 3.5x or less on the RAC leverage level by year-end 2016.

[John Healy:]

Okay. Thank you.

[Operator:]

We have a question from the line of Afua Ahwoi with Goldman Sachs. Please go ahead.

[Afua Ahwoi:]

Hey, hello. Thanks for taking my question. So just two for me really quick. First, I'm trying to reconcile some of the comment you made on the industry capacity and utilization, and maybe the answer lies in the type of car. But it strikes me as interesting that both you and Avis have reported improvements in utilization but both mentioned that (49

[John P. Tague:]

Yes. Relative to the first comment, look, until all fleets are tied across the industry and in fact until we're spilling demands. In other words, we're actually rejecting some demand, we're not getting pricing power as a participant or at the sector level. So I think that the approach to this issue has got to change to a willingness and a reward from having a little bit less than what demand ultimately calls for as opposed to a little bit too much. So, when that occurs, you'll see corresponding improvements. Until that occurs, we will collectively be frustrated.

[Tom Kennedy:]

So, as it relates to residual, I think your question was related to the 2.5% and what are we seeing current trends relative to some of the market indicators at Manheim and others. As we went through the first quarter, you can read our disclosure. We did have a $27 million adjustment related to fleet depreciation. It was primarily related to midsized compact cars as it relates to the weakness we saw in the market. And we were able to accommodate that within our guidance range of 2.5% decline because we came out, as you noted, early in the year and called a 2.5% decline, albeit some people thought that at the time might be conservative. We thought it was appropriate relative to the market noise relative to how residuals were developing. We also believe that residuals were somewhat under pressure in the first quarter due to the, I think, what was an excessive amount of de-fleeting by the industry which did put some transitory pressures on the residual environment on certain fleet types. So, as we move forward, looked at our forward review of fleet residuals, we obviously look at it all the way down to a thin level. We use external sources as forecast and we do our own qualitative analysis on our own performance over the last six months, three months and one-month of disposals on each channel and incorporate that into our core residual view and again believe our 2.5% decline is consistent with our own expectations. Clearly 2.5%, some folks might think that is not enough. You might go back and look at the history when the industry was under significant pressure and it was in the 3.3% range decline overall for the average year. So, again, we think our guidance is close to what we thought would be a very challenging historical comp to replicate and so nonetheless, we believe our 2.5% is appropriate relative to our expectations this year.

[Afua Ahwoi:]

Okay. Thank you.

[Operator:]

We have a question from the line of Kevin Milota with JPMorgan. Please go ahead.

[Kevin M. Milota:]

Hey. Good morning. A couple of questions here. One, if you could give us a sense for how booked you are right now in U.S. RAC for the second quarter and third quarter? Second question being that first quarter was down 10% on price, for the second quarter is the cadence going to be similar or is it kind of half that at down 5%, similar to what you achieved in the fourth quarter? Could you give us a sense for kind of what the next move is on pricing? That'd be helpful. Thank you.

[John P. Tague:]

I can appreciate why we'd all like to know the answer to those questions, but we're not in a position to provide specific guidance there. One of the difficult things about revenue visibility in this industry is the extreme shortness of booking curve, which is partly a function of pricing structure and excess supply. I think it could be a much longer more indicative booking curve than it is, but for the time being most of that activity is incurring within 30 days of pickup. So, I don't know that – booking trends I would say are positive, but the data sample is small when you go beyond 30 days.

[Operator:]

And we have questions from the line of Rich Kwas with Wells Fargo Securities. Please go ahead.

[Ron J. Jewsikow:]

Yeah. Good morning. This is Ron Jewsikow on for Rich Kwas. I just had a question, has there been any pressure from OEMs to offload fleet or have you pushbacked at any time to do so?

[Tom Kennedy:]

Hi, Ron. It's Tom. No, there hasn't been any pressure by OEMs to offload fleet. We're obviously monitoring inventory gains of all the manufacturers and perhaps we will be able to reach out when we see what might be building up of inventories of certain manufacturers (54

[Ron J. Jewsikow:]

Thanks for that color. And then on the topic of revenue visibility, how is the progress going on the implementation of prepayment options for customers?

[Jeffrey T. Foland:]

This is Jeff. So, we actually have some prepayment options in the marketplace today, which has grown significantly on a year-over-year basis. What you may be referring to is the ability to capture the payment card information upfront across brands, and the ability to offer various product offerings associated with that. We are on track to have that capability by midyear this year for a portion of our brand portfolio and will be filed with the remainder of our brand portfolio at a later point in time. So, once again, midyear we'll have the capability and at that point in time we'll start various in-market programs and tests.

[Ron J. Jewsikow:]

That's very helpful. Thanks for taking my questions.

[Operator:]

And we have a question from the line of Brian Johnson with Barclays. Please go ahead.

[Dan M. Levy:]

Hi. Yes. This is Dan Levy on for Brian. Thank you. First, I wanted to ask a question just on your purchases of fleet. Just given the pressure that we've seen in the small and midsized car market, have you been able to get any benefits within the cap costs to reflect the weak sedan pricing that's happening in the new retail market? Have you seen any of those benefits in your cap costs?

[Jeffrey T. Foland:]

We don't get into specific disclosure and particularly when we're in the middle of negotiations with OEMs on our cap costs year-over-year. But to be clear, obviously there have been residual pressures, and as a result, discussions have to start with our cap cost reduction relative to the residual aftermarket on those types of fleet. So clearly that's an objective, I'm sure, all the industry has as well as ourselves and I think the OEMs are understanding of that need and given the residual values of those types of fleet types declining, there has to be a similar decline of cap costs.

[Dan M. Levy:]

Okay, understood. And a question just on broader fleet industry capacity following up on what had been previously asked. I mean look, we saw in the quarter that in the first quarter that OEM new car sales into the rental industry were up 12% quite significantly and I understand that part of that is the offset you mentioned by quite significant sales into the used market. But could we just understand if there was an issue of excess fleet, wouldn't you have had any ability to delay or offset some of those purchases so that there would a net disposal? I mean, I guess this is more a question with regard to the broader industry, but we would just – would've assumed if you're having issues with excess fleet – if the industry was having issues with excess fleet, that some of those purchases could've been delayed or canceled?

[John P. Tague:]

Dan, I think we've heard anecdotally that that may have occurred in some cases. Our fleet was down 6% in the quarter year-over-year.

[Tom Kennedy:]

Yeah, I think it's – generally speaking from a fleet planning perspective, it's very challenging once you make a commitment to a manufacturer and you come up with a supply plan to materially move that out. So, I would not take so much focus on quarter-to-quarter, year-over-year adds or sales to rental car because, a) to your point, you're missing the disposal component of that equation, so you don't really know what happens to the net fleet for the industry; and b) it is more difficult to effectuate change kind of near-term quarter-to-quarter versus a longer-term horizon and a fleet planning perspective that daily rentals can then plan for and adjust for along in partnership with the manufacturers, who are relying upon a supply plan and a commitment plan and an order plan for their own planning in their own factory orders. So, I would not take too much credence into a 0.25 point estimate as an indicative issue that it does not appear to be addressing what we believe was to be an oversupply. I think it's a longer term horizon and again I think when one does that you're missing, to your point, the larger component of the equation, which is the disposal component, which we understand and you've probably seen this as well – it was very significant in the first quarter for all the dealer rental car companies.

[John P. Tague:]

And I think, again – look, as Tom indicates, we were executing on a capacity fleet reduction plan that was largely determined last September/October.

[Dan M. Levy:]

Understood. Thank you.

[Operator:]

We have a question from the line of Michael Millman with Millman Research. Please go ahead.

[Michael Millman:]

Thank you. I think you've indicated that over the last few years you've lost share on the airports. Can you talk to us about – to what extent you're trying to regain that share has contributed to what's going on in pricing; and also sort of related, can you draw, I guess, a line in the sand to say we will not rent below this price. We would hold it for another day.

[John P. Tague:]

So, first off, I think we've been consistent for some time. We're not going to try and regain share through price. We are going to try and participate to maintain share. So, I don't think it would be appropriate to draw a line between those two outcomes and I think that's evidenced by where you've seen our growth both in capacity and transactions vis-à-vis other industry participants. So, that would be our view in that regard. I don't think it's helpful to be dogmatic about where variable costs are vis-à-vis the use of fleet. I think that it's appropriate to observe; some activity in the market at times seems like it may be below variable costs, but we all have our own perspectives on that. So, no, we would not establish a transparent minimum.

[Michael Millman:]

Okay. Thank you.

[Operator:]

And our last question comes from the line of Ben Clifford with Nomura. Please go ahead.

[Ben Clifford:]

Hey, guys. Good morning. Just one question. It looks like your cash tax guidance for 2016 is definitely elevated, it may be the highest levels we've seen over the last five years or six years. Can you talk about what's driving that? And what the outlook on that cash tax number could be post 2016?

[Tom Kennedy:]

Yeah. No problem, Ben. So, I would say this year's cash tax guidance is somewhat higher than what we would say the normal rate would be to some potential expectations on where we might have some tax cash exposure in certain foreign jurisdictions on some historical audits that are ongoing. So, it's a conservative assumption that we might have to settle some historical audits. It is not related to any change in our view of being a federal tax cash, taxpayer in the U.S. and we don't expect that to happen any time based on some of the bonus depreciation extension prior to 2018 and 2019 at the earliest. So, it is in no way related to any changes in fleet plans that folks have had concerns about or a mismatching of the LKE relative to fleet growth. It is simply a function of our conservative view on potential settlement of some tax disputes in some foreign jurisdictions.

[Ben Clifford:]

Great. Thanks. And then final question, how much of your disposals in Q1 were program cars versus at-risk cars?

[Tom Kennedy:]

So, we didn't disclose per se our total disposals, but we disclosed a similar number of cars in Q1. I know the follow-up question which I will just anticipate and answer directly is what percentage of your risk cars you have disposed off relative to your expectations for the year? Through the month of April, that will be in excess of 40%. So, we did have a fairly aggressive disposal. And again, it was similar to last year when we were going through the fleet rotation overall disposal. So, as you can see from just that basis, we were pretty aggressive on managing fleet despite not going through a large fleet rotation. But our overall risk disposals at least through the month of April, which in my latest data point would represent about 40-plus percent of our overall expected disposal of risk fleet for the year.

[Ben Clifford:]

Great. Thank you.

[Operator:]

And there are no further questions at this time. Please continue.

[John P. Tague:]

Thanks Linda. John here. I think we are clear that we have a path to deal with both the perceived and real threats to value as opposed to a path to seize the opportunity we have as a company around our internal ability to generate value in execution of excellence as well as our strategic ability to position the company to be more relevant in a rapidly changing marketplace that we feel clearly provides more value than it represents risk. And we'll continue to report on our progress as we go quarter to quarter and we thank you for your engagement and support.

[Operator:]

That does conclude our conference for today. Thank you for your participation and using AT&T Executive Teleconference Service. You may now disconnect.